Is Google a source of creative destruction--or just plain destruction?

I'd argue the former, although to companies whose industries are getting undercut by the Google juggernaut, the "creative" side of Google's market-changing activities may appear out of reach.

Google is steadily implementing a strategy, across many markets, of building services that sit right in front of the user and that act as gateways between the user and other online services. Google makes money from traffic to these gateway sites, as well as, oftentimes, from the sites it directs traffic to. And Google ends up controlling the game.

How do other companies make money and build loyalty among consumers when their services become commodities, access to which is doled out by Google? Their business models are getting destroyed--perhaps deservedly so, though not always. Some new companies are figuring out how to work in a world where they have limited direct access to the consumer and very little brand loyalty. But companies with older models to protect are having a hard time adjusting.

Of course, Google is hardly the only reason these industries are facing disruption. New technologies and new consumer trends have made some change inevitable. And many of these markets, such as journalism, are easy pickings. But there's little question that Google's prevailing business model is predicated on landing smack in the middle of existing markets.

More than a decade ago, banks fretted that Microsoft would become an intermediary between the financial world and its customers. Microsoft never quite managed to pull that off. But Google is doing exactly that in several markets (admittedly, with mixed success) and attempting to extend its reach into new areas, such as social media.

Let's look at a few examples:

Journalism

The number of users who arrive on news Web sites, and on blogs, via Google search (known as the "side door" among publishers) is increasing. People coming to a story via search don't get to experience a site's full brand. Loyalty is reduced.

This is a destructive pattern for the old media model. In every periodical's publishing endeavor, you have your hit stories and your misses. Mostly misses. Writers keep banging away at their topic areas hoping to get a killer story--a scoop of fact or of perception, a conversation starter, something. They are paid to keep trying. They are paid for the stories that suck. The famous San Francisco daily columnist, Herb Caen, once said that if he wrote one good column a week, he considered that a success. In the traditional model, through advertising and subscriptions, the readers paid for all the stories, even the boring ones.

When traffic to stories is gated by PageRank and search, and stories are directly monetized, only the top page-turning stories make money. The money leaves a clearer trail than it ever did, and publishers follow it, opting for the production of sure hits. Journalism faces destruction because journalists and their publishers learn to fear risk-taking.

I am convinced that there is a creative way around this destruction, since telling a good story has always been one of the most prized skills in society, and creativity does not survive being put in a box. I also believe it's a positive development that writers now know immediately when they've written something their readers like. But I do think that the traditional business model for journalism will have to be destroyed before it is rebuilt for the Web.

(To be fair, Craigslist has had a big hand in the destruction of the newspaper business, too.)

Telecommunications

Google Voice has the potential to creatively destroy the telephone industry. While at the moment it needs existing phone networks to function, there's reason to believe the company will at some point begin offering phone service of its own, or at the very least work with mobile carriers (as it is with its Android mobile phone operating system) to create a Google-branded telecommunications experience. But unlike other Internet-based telephone solutions that require people to transfer their numbers and contacts to the new system, Google Voice will also work for people who don't move over all at once to the new system. That makes it insidious, and damn smart.

People who start giving out their Google Voice number instead of their existing landline or mobile numbers stop relying on their carriers, since their number easily can move with them when they switch services. And don't even try to compare managing a local number portability change to Google Voice; it's not fair to the telecoms. In many ways, Google Voice is a superior front-end to existing phone services than is any current telephone handset, due to the ways it does visual voicemail (with voice recognition, spotty though it may be), and its capabilities to handle multiple phone lines, SMS, and rule-based call routing. Google Voice is a strong "gateway" to other phone products. It's worthy of users' loyalty, so much so that it may destroy traditional carriers' balance sheets by increasing their churn by a rate even greater than it is today.

The good news is that it may force the carriers to finally start releasing customer-friendly services. But I doubt they'll be able to do it fast enough.

Operating systems

When the Web browser becomes the primary framework that developers write for, Google wins. And you know who loses. Microsoft (and Apple) should fear Google, which is currently pushing a lot of change through the browser world.

Since the company introduced Chrome, it's been pushing browser developers to finalize, adopt, and roll out HTML 5, a new version of the core page rendering language. HTML 5 adds capabilities that make the browser a much more capable application platform than it has been to date. With HTML 5, applications can work quickly and smoothly (like real desktop apps), and even work when disconnected from the Internet. Ultimately, people will stop caring much about what operating system they have underneath their browser; Internet Explorer and Safari are insufficiently differentiated to lock users in with their host OSes. Sure, users still need an OS and have to pay for one, but their loyalty to the platform will be undermined, reducing repeat purchases and driving down price. (Adobe Flash and AIR could also, theoretically, get killed by HTML 5.)

The creative part of the OS market destruction: It forces OS and hardware manufacturers to innovate and create things that the browser cannot deliver. You still need a box to hold your screen and keyboard. You still need speed and good battery life. You need some level of local machine security. And mostly, you need an operating system that gets the hell out of the way so people can focus on their new browser-based apps. The real destruction is in the profit margins on these new invisible operating systems. Who wants to pay for something they'll never see?

E-mail

Google killed the e-mail business years ago, when it launched Gmail. Prior to that, there were free online e-mail apps, but they were limited in storage and features. If you wanted really capable e-mail, you paid for an app (or downloaded a freeware version), and you paid for an e-mail service. Gmail decimated that business. However, there are still e-mail servers running and providing value to their users--even if those users may be using Gmail to access their mail.

Now, Google is trying to destroy them, too. The brand-new Wave product is a clever (and, frankly, overdue) re-think of how e-mail should work. But to take full advantage of Wave, you need to use the Wave service on Google's servers. Google does plan to open up the platform so Wave can front-end other services, just like it did in Gmail, but that's a stopgap to bring old-fashioned e-mail users into the Wave world. Google will run the Wave servers. (Update: This turns out not to be true. Please see my correction: "Google won't run all the Wave servers.")

Of course, Wave may not succeed. It's a dramatically different approach to e-mail, compared with what people are accustomed to. But if a new generation of users can see its value, it could make a big dent.

Advertising

Of all the industries Google has wrecked, probably none need wrecking more than advertising, and the destruction is under way. Google (and other companies) have contributed to ads that are highly targeted, metered for performance, and market-priced. This is what modern advertising should be, but it kills the old model in which gatekeepers used or invented information scarcity to prop up the prices of ads.

The advertising business was not built on openness and transparency. It was built on influence, expensive surveys, and handshakes. The new model empowers advertisers to find the people they want to reach, with more or less transparent pricing. It increases the value of advertising dollars by creating visibility into the product.

Since online ads can be so highly targeted and so closely tracked, big advertising contracts are slowly making their way from traditional media to the Internet. This is good for Google, and it's good for the rest of the Web as well.

Google doesn't win every battle. It has not taken the gate position in the social-networking space, and I don't believe it can topple Twitter (unless it buys it). But Google is very good at taking old, tradition-bound markets and figuring out how to sit on top of them.

About the author

Rafe Needleman reviews mobile apps and products for fun, and picks startups apart when he gets bored. He has evaluated thousands of new companies, most of which have since gone out of business.
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